Earnings Call Transcript - VSAT Q4 2023

Mark Dankberg, Chairman and CEO

Hello, and welcome to Viasat's Q4 Fiscal Year 2023 Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO. Thanks. Good afternoon, everybody. Thanks for joining us for our call today. We released our shareholder letter shortly after market close this afternoon, and it's still available on our website. We'll be referring to that on this call. So joining me on the call today are Guru Graben, our new President, Kevin Harkerider, our COO, Shawn Duffy, our Chief Financial Officer, Robert Blair, our General Counsel, Paul Froelich from Corporate Development, and Peter Lopez from Investor Relations as well. So before we start, Robert will provide our safe harbor guidance.

Robert Blair, General Counsel

Thanks, Mark. As you know, this discussion will contain forward-looking statements. This is a reminder that factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website. Back to you, Mark.

Mark Dankberg, Chairman and CEO

Thanks. Okay. So to start, I'll briefly try to recap the business and financial highlights and also I'd like to introduce our new President, Guru Graben. And then we'll open it up for questions. So for us, the biggest highlight is that our Viasat ViaSat-3 Americas satellite has arrived at its orbital location, and it's beginning its final deployments. But that's not done; we can complete in-orbit testing, and we can start bringing up the network. We're aiming to be in service around mid-summer, and that's going to greatly expand our coverage and provide bandwidth to grow all of our satellite services businesses. It's been an enormous undertaking by our whole team, and I want to thank everybody for their commitment and dedication. We've got just a few more steps to go for this first one, with the Europe, Middle East, Africa satellite launching later this calendar year, and then the Asia Pacific satellite, again, almost complete global coverage. The Asia Pacific satellite is now in final integration and test with Boeing. We believe the combination of virtually global coverage, the amount of useful bandwidth per capital dollar invested, and the ability to dynamically move that bandwidth to the places with the greatest demand are unique to the satellite market. These satellites will prove to be especially valuable in the global mobile markets. We now anticipate closing the Inmarsat transaction this month. We received approval in the U.K. and have only two more steps to go. We believe the transaction will be accretive to adjusted EBITDA and free cash flow on a per share basis and can help both companies provide better services to our customers at lower cost. Both Viasat and Inmarsat have continued to grow our global mobile businesses in the 18 months since we reached agreement. Inmarsat just reported their most recent results, and you can find them on their website. And we also continue to expect that together, we can bring more important innovations and growth to their L-band business as well, especially in the rapidly evolving Internet of Things and direct-to-device markets. Early in our fourth quarter, we did close the sale of our Link 16 TDL business for $1.9 billion. That increased our liquidity and significantly reduced our leverage on a standalone basis as well as prospectively on a combined basis with Inmarsat. Post-closure, we did quickly right-size the company to the new run rate, which reduces annual run rate operating costs by about $40 million. We presented our financial performance in the letter in terms of continuing operations that excludes Link 16 TDL business in prior periods, and also our total results of operations including Link 16 TDL in the period that we owned it. Continuing operations provides context for results on a go-forward basis. We achieved new records in awards and revenue from continuing operations for fiscal year 2023 at $2.8 billion and $2.6 billion, respectively. Adjusted EBITDA from continuing operations was $501 million, and with three quarters of TDL results prior to the Q4 sales, total adjusted EBITDA was $583 million for the year. Q4 results on a continuing basis were good and provide momentum going into fiscal '24. Q4 revenue from continuing operations grew 10% year-over-year to $666 million, and adjusted EBITDA from continued operations was $124 million, which was up 21% year-over-year. In Government Systems, the certification of key products, some cryptographic products cleared pent-up demand that had been accruing, and that drove significant year-over-year revenue growth in the quarter. We grew our commercial in-flight connectivity service fleet to 2,230 aircraft. We added Etihad Airways as a new airline partner, and we expanded our Delta Airlines free Wi-Fi initiative. We continued market testing and analysis of new ViaSat-3 era fixed broadband plans, offering significantly higher speeds and more bandwidth per subscriber. We've been working and investing in a very capital-intensive phase for several years to develop and deploy technology and business models, transforming from a strong range player into a leading global satellite services operator. Now we can see tangible evidence of the pieces coming together and the opportunity to generate real free cash flow returns from those investments. That includes not only our own business areas but the very complementary people, resources, and assets from Inmarsat. Given all those elements, now we need to execute and scale. And to that end, I'd like to briefly introduce a new member of our leadership team, Guru Graben, who joins us as President, and we really want to thank Rick Baldridge, our Vice Chairman, for all he's done for us in his operating calls. With Guru here, Rick will continue to support special projects and will remain on our board as Vice Chairman. Guru's previous position was at Verizon Media as CEO of the former media division that included Yahoo, AOL, Huffington Post, TechCrunch, and other media brands. He is a very accomplished leader with experience in integrating large technology operations, operating scaled Internet platforms, and creating powerful global partnerships. So Guru, introduce yourself, please.

Guru Gowrappan, President

Thank you, Mark. And thanks to all of you joining us today on my first earnings call. I'm thrilled to have joined Viasat, a company with a rich history of success and innovation. Our foundational technology advantage has delivered healthy growth over time, and we are poised for an incredibly exciting future as we continue as a team. Having dedicated my career to fostering global connectivity and interactivity across key tech consumer and B2B products, including telecommunications, I am now embarking on my biggest mission yet. Moreover, as you know, I've joined Viasat at an inflection point with the launch of our ViaSat-3 Americas satellite. The first step in placing more than $2 billion of assets into service and three satellite constellations is expected to increase the scale of our network more than eight times the combined bandwidth of ViaSat-1 and ViaSat-2, with the flexibility to move capacity to high-demand locations while expanding our coverage globally. It's also important to me that space sustainability is a priority here. We intend to grow our network where our customers are, delivering the services they want and need in a globally inclusive and environmentally sustainable manner, all through technology innovation. Finally, the closing of the Inmarsat acquisition will be great for all our stakeholders as it will accelerate our global expansion and our growth in mobility and government, areas that are well-suited for our products and solutions. Inmarsat's legacy will also help us achieve our goals for global inclusive growth and space sustainability. As our CapEx cycles wane, the deal is expected to double our free cash flow per share compared to standalone Viasat. I'm also personally very excited about the potential for growth in L-band, IoT, direct-to-device, and it has the potential to enormously expand the number of individual customers and B2B relationships we can achieve collectively. I want to congratulate the team, Rajeev, Tony, and the entire team at Inmarsat for a record quarter with growth across all of their businesses. Now, having been in the business of making impactful and rewarding connections for customers, I am humbled to be on this endeavor alongside this incredible team. Throughout my career, I've always focused on five key areas: employment culture, technology innovation and products, customers and partners, society, and shareholders. I believe with hard work and relentless execution, coupled with humility and teamwork, that we can build a brighter future for all our stakeholders. Our goal is to drive excellent financial performance while maximizing our impact on the world. Here at Viasat, I am eager to collaborate with Mark, Rick, Shawn, Robert, and our entire team to do just that, because the opportunities here are extraordinary. And with that, I'll hand it back over to you, Mark.

Mark Dankberg, Chairman and CEO

Good. Thanks, Guru. So thanks and welcome to Viasat. So with that, we'll open it up for questions.

Operator, Operator

And your first question comes from the line of Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss, Analyst

Thanks. Good afternoon, everybody. Hi, Ric. Good to see the finish line is getting closer for the Inmarsat deal. Can you update us as far as what's happening with the debt package? What are the terms? Are there any changes to that as you get closer to being able to close the transaction?

Shawn Duffy, CFO

Hi, Ric. This is Shawn. So I think there's still a lot of moving parts. I mean, things are looking really good as we go to the finish line here. I think the way we look at it is, we secured that package back when we signed the transaction and have pulled the elements of that deal that reflect the market at the time. Our intentions are to execute those economics. So that's the best way to shape it up.

Ric Prentiss, Analyst

Okay. Can you just remind us what the terms were in that package that was obviously a different moment in time? It would be great to remind us what the terms were.

Shawn Duffy, CFO

Yes, we don't have those details publicly available, Ric. However, I believe they are certainly more favorable than our current situation.

Ric Prentiss, Analyst

Sure. Although I can't remember it. Following along that line, Guru, first welcome, I should have said that first. Help us understand, you mentioned a couple of times how you've got a lot of integration with technology items. As you look at the integration of Viasat and Inmarsat, help us understand what your top priorities are going to be there, what's the timeline like? And could there be any segment reporting changes?

Mark Dankberg, Chairman and CEO

One of our primary objectives is to grow in the global mobile markets that operate on a broadband basis. We engage in several key markets, including government, commercial in-flight services, business jets, and maritime. Our goal is to leverage the strengths of both companies, which will require effort. A significant focus is on the different go-to-market strategies of the companies; Viasat generally relies on direct sales, which demands more technical support, results in lower margins, and allows for greater control over customer experience. In contrast, Inmarsat typically operates on a wholesale basis with higher margins and an established global network. We see valuable aspects in both business models and service delivery methods that we intend to combine. We greatly value Inmarsat’s distribution relationships and plan to enhance our service delivery to these partners, offering a broader range of services than some partners may currently provide. Combining the best elements of both companies is a top priority. Another major focus is integrating our two networks. The merger of Viasat and Inmarsat is appealing because we both manage networks, presenting significant synergy opportunities as we work towards making our platforms compatible with one another. With Inmarsat's network, we will achieve global reach even before launching the next two ViaSat-3 satellites. Once the ViaSat-3 satellites are operational, our coverage and capacity will significantly improve, allowing us to expand our successful U.S. services globally. These are our two main priorities. Additionally, we aspire to leverage the technologies developed at Viasat in the L-band markets. We identify substantial potential in the L-band market, aiming to replicate the successes we've achieved in the Ka-band by enhancing speed, increasing bandwidth, and reducing airtime costs. We are very enthusiastic about these opportunities.

Guru Gowrappan, President

And Mark, if I can add. Ric, thanks for the comment earlier. What I would say on top of it, when you think about integration, we have a very good plan in place as and when the deal gets closed. Lot of focus is, if you look at the performance of individual companies, as Mark said, there are things that are working well, and we want to make sure we don't miss a beat on those things, including you saw the latest results from Inmarsat for the last quarter. We want to make sure we maintain that and then these incremental things, as Mark talked about, we at least have good thinking and plan in place to start executing on it.

Ric Prentiss, Analyst

And the final one for me to wrap up on that third opportunity, L-band. Is there an opportunity for S-band as well in this direct-to-device category? And how does this business take off with the directed device? And what do you need to have in place besides just the spectrum?

Mark Dankberg, Chairman and CEO

The opportunity for direct-to-device is really going to be driven by when we talk about direct-to-device, a lot of times what people are referring to are devices that are primarily intended to operate on terrestrial networks, but that can also work directly on satellite networks. The big opportunities, especially there for those frequencies, are easier to integrate into those terrestrial devices. This includes both L and S-band. There are different approaches to it. We think that a big advantage of being able to do that with dedicated device MSS spectrum is that this spectrum will pair well with the terrestrial frequencies and those devices will operate on. We think this will allow us to address geographic locations that are within the territory areas of these terrestrial networks but just get poor service for various reasons. That's going to be one of the biggest attractions of using licensed MSS spectrum. One of the challenges in growth is that these are new capabilities for those devices. The market cannot scale faster than those devices get to market. On the other hand, one of the really attractive things about us and Inmarsat having existing L-band MSS businesses is that we can evolve that without having a big ramp-up period. That's one of our objectives; we think the same techniques that will make our services available and attractive to the terrestrial devices will also expand the market for the existing devices. We can just provide much better services. That's our objective, and we see it as an attractive growth market for us.

Ric Prentiss, Analyst

Great. Appreciate it. You stay well.

Mark Dankberg, Chairman and CEO

Thanks, Ric.

Operator, Operator

Your next question comes from the line of Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery, Analyst

Great, thank you very much. Good evening and Guru, good to connect with you again. Could we talk about IFC for a minute? First, any color on the backlog? It sounds like you've been continuing to win there, so what's the outlook in terms of adding additional aircraft and growing volume on those aircraft? And what are you seeing in terms of the competitive landscape, the opening of the airlines to consider some of these LEO constellations? Is that something that they are exploring, or do they really prefer the geo solution for now?

Mark Dankberg, Chairman and CEO

Okay. One, our in-flight connectivity business has been really, really good. I think we've got a backlog of over 1,300 claims. So even though we've been installing at a high rate, we've been winning at an even higher rate, which is great. I think the reason we've been successful are the things that we've been highlighting to the airlines, which is kind of the simplest way to put it: three, four years ago, if you wanted to impress an airline with your capabilities on in-flight connectivity, you would find an airplane and show them a speed of 100 megabits or 200 megabits, and they would say that’s good. I think what the airlines have really come to appreciate is what's really hard is serving the peak demands at the busiest airports, especially those airports that have not only airline traffic but also are popular port cities with maritime traffic and even more traffic. It's that geographic concentration of demand that I think is going to be the most challenging issue. What we're hearing from the airlines is they want a good solution that offers their passengers not only the connectivity but that connectivity is pretty closely intertwined with their entertainment options, both live and stored entertainment. Yes, of course, they're open to LEO, GEO, whatever will allow them to deliver the services that their passengers want affordably. I think that's what they're going to be open to. So we're going to make sure that we're competitive there. That's what's driving us, and I think this Inmarsat transaction is going to really help us do that.

Guru Gowrappan, President

Simon, sorry, great to reconnect. The other point I would just say, that Mark said, in the end, great products win. I think what we have is a much superior experience and product, and that's why the backlog and how we've been winning the customers as well. So that speaks to our core product and technology.

Simon Flannery, Analyst

Great. And then on the consumer broadband, you've been constrained on capacity for several years now. What do you think the TAM is? Is it 5% of U.S. households? We've obviously seen Starlink make some strides there. How does your product stack up against that as we commercialize ViaSat-3?

Mark Dankberg, Chairman and CEO

If you broadly define the addressable market for satellite broadband as those homes where the satellite industry can provide a service better than terrestrial options, that’s the framework. The challenge has been increasing, but if you're able to deliver speeds of 25, 50, or 100 megabits per second with enough bandwidth for streaming, you can be competitive. Currently, that market is estimated at around 10 to 15 million homes. However, we expect that number to decrease to 5 to 7 million homes by the end of the decade due to the planned infrastructure developments. Our aim is to capture a modest share of this growth in broadband, and we believe this market is reasonably conservative regarding potential market share.

Simon Flannery, Analyst

Great. All right, thanks.

Mark Dankberg, Chairman and CEO

Thanks, Simon.

Operator, Operator

Your next question comes from the line of Mike Crawford with B. Riley. Please go ahead.

Mike Crawford, Analyst

Thank you. I would like to revisit the initial question regarding the debt. I understood that there was some public information indicating that the agreement would remain in effect until the end of May. Would you need to renegotiate if it appears that the timeframe might extend beyond two weeks from now?

Shawn Duffy, CFO

Mike, this is Shawn. The way I look at it is, as I said, still lots of moving parts. We've had some really good milestones, and we're trying to close within our expected time frames. But again, I agree there are lots of moving parts.

Mike Crawford, Analyst

So there was not an end of May component.

Shawn Duffy, CFO

The financing did have a time frame to it. Absolutely. It stretched a bit originally beyond the original date we had.

Mike Crawford, Analyst

Okay. Thank you. And then change in topic. The SEC's NPRM for a single network future with supplemental conversion space and your comments, Viasat's argument for a technology-neutral approach that enables GSO systems, in addition to non-geostationary systems, to participate in direct-to-handset connectivity. The rules being proposed that way do you care to handicap the likelihood that the FCC is going to include GSO by the time we get a final report in order here?

Mark Dankberg, Chairman and CEO

Okay. One thing is, there's no restriction on devices that can be used with geosynchronous networks. If the geosynchronous networks are capable of closing those links with the service level, availability, and pricing that customers want, then they're going to be completely fine. There's already work underway both in the U.S. and globally to demonstrate that and to bring those services to market. But it is a complicated regulatory environment. We think that the solution is going to end up being a combination of geosynchronous and non-geosynchronous satellites. One of the biggest issues in this direct-to-device market is the geographic concentration of demand because the amount of demand, especially in the direct-to-device market, is not nearly as great as that in population centers, especially in an environment where you have dedicated licensed spectrum and can serve those populated areas that have black spots. It’s a dynamic area, but we don't see any reason that it's going to be exclusive to any particular orbit.

Mike Crawford, Analyst

Thank you, Mark. I have one final question. Previously, you were working on a test for the online site satellite that utilized Link-16, which I believe was associated with Link-16 sales. Does Viasat still have the capability and interest in pursuing opportunities as a merchant satellite manufacturer?

Mark Dankberg, Chairman and CEO

Okay. So two things. One is the contracts that we had for Link-16 in space did go with the TDL sale. We still have working relationships around Link-16 with L3. There are also other tactical link programs other than Link-16 in and around L-band that are interesting to terrific radio customers. We are continuing to work on that. That's one of the attractions of the L-band direct-to-device market is that it opens up some unique defense opportunities that are outside the Link-16 area. So we are still working on those.

Mike Crawford, Analyst

And just ancillary to that, just tell us where waveform has been in all this?

Mark Dankberg, Chairman and CEO

It certainly could. That's possible.

Mike Crawford, Analyst

Okay, thank you.

Mark Dankberg, Chairman and CEO

Thanks, Mike.

Operator, Operator

And there are no further questions at this time. I will turn the call back to Mark Dankberg.

Mark Dankberg, Chairman and CEO

Okay. Well, thanks very much, everybody, for joining us this time. We'll look forward to speaking with you again next quarter.

Operator, Operator

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.